First year of Registered Domestic Partnership in Community Property state

[Anonymous]

This question has been asked a number of times but never answered clearly. I entered a Registered Domestic Partnership on May 1. We are in a community property state (CA). We have fully mingled finances and have been mingled since before the RDP began. There are at least three ways I could imagine needing to classify our income/withholding (NOTE: this question is only about how to handle this first year, where we were not in an RDP all year; it is clear how to do this for subsequent years):

1) Easy: since we were in a RDP on 12/31, all income/withholding can be considered community property

2) Not too hard: Pro-rate it. Since we were single for 4 months and RDP for 8 months of the year, 1/4 of all income/withholding is separate property and 3/4 is community property to be divided 50-50

3) Very onerous: the precise amount of income/interest/dividends from the first 4 months must be determined and considered separate property and all the rest is community property. This would involve combing through monthly statements and paystubs.

Is (1) or (2) acceptable? Is it at our discretion which one to choose?

Please no answers with links to https://turbotax.intuit.com/tax-tips/marriage/five-tax-tips-for-community-property-states/L4jG7cq7Z or https://www.irs.gov/pub/irs-pdf/p555.pdf The answer to this question is NOT there.

[AliciaP1]

The correct answer is #1 on your list but only gets split if you are filing with the Married/RDP filing separately status for your CA return.  You are eligible to file Married/RDP filing jointly if you would rather file that way.  Since you are not legally married, you can only file Single or Head of Household, whichever applies, for your Federal return.  You will then need to mark that your state return is being filed with a different filing status than your federal return.

See Registered domestic partner (RDP) for more specifics on the filing statuses on CA returns.

[Anonymous]

Right, I know we have to each file Single for federal returns, and CA state return is relatively easy because we are "normally married" according to CA. The question is the allocation of community vs separate property as it pertains to our separate Single federal returns (i.e. for Form 8958). Are you saying (1) is also the correct answer for that?

[AliciaP1]

For your federal returns, you need to each report your own forms (W-2, 1099-NEC, 1099-MISC, etc) as they were issued.  

If you have a form issued to both of your names, you will report that according to the social security number shown as the payee/payer on the form.  For instance, if you have a joint savings account and are issued a 1099-INT with both names but your (not your partner's) SSN on it, you will report the income and your partner will not.

[Anonymous]

That makes sense that the W2 aren't altered. I'm looking at steps 5 and 6 of Part I here: https://ttlc.intuit.com/turbotax-support/en-us/help-article/taxation/prepare-rdp-return-live-califor...

To figure out how much to adjust my income, I need to determine my "share of the community property". Is all of both our incomes for the year community property or do we need to pro-rate it by the period of the year where we were actually RDPs? It sounds like you are saying we don't need to pro-rate and all income for the year is community property, correct?

Relatedly, how do we allocate qualified dividend income between the two of us on the Community Property Income Adjustments page? This box seems to just adjust our income which is fine for W2 and interest income but qualified dividend income should be at the capital gains rate.

[DaveF1006 · Accepted solution]

Yes, if were in the RDP for part of the year, you will need to allocate your income for the entire year thus all income is community property income.

As far as qualified dividends, if the amount is less than $41,676, the capital gains rate is 0 thus there is nothing to allocate. If more than $41,676 and less than $459,000, the rate is 15%. You would need to determine the capital gain on qualified dividends. So if your combined qualified dividends is $100K, this means you will allocate that amount 50/50. Your capital gain you will allocate is $15,000, thus you will report $7500 capital gain in your 8958 and your partner will report $7500 in theirs as well. The $15,000 is determined by $100 X.15 =$15,000. 

If your situation does not follow within the parameters of my advice, please reach out and we will clarify this to your satisfaction We are here to help.

@Anonymous 

[Anonymous]

@DaveF1006 This is very helpful, thanks!

One more question in this vein: I assume that taxable wages (W2 box 1) income goes in the form 8958 part 1. How do you indicate how you are allocating Medicare wages on that form (and importantly, how do you indicate that to TurboTax)? For the form, perhaps using separate lines, i.e.:

Employer 1 (taxable wages) ...

Employer 1 (Medicare wages) ...

Employer 2 (taxable wages) ...

Employer 2 (Medicare wages) ...

No idea how to tell TurboTax how to adjust Medicare wages since the only option is the "total income adjustment" entry box.

This might be relevant for a hypothetical partnership where one makes 250k and one makes 100k. As re-allocating money from the 250k earner moves them below the threshold for Additional Medicare Tax Form 8959.

Similarly, how do I indicate on TurboTax the amount of interest/dividend income that was re-allocated which will be subject to NIIT?

[RobertB4444]

I'm going to refer you back to the answer that you received above from @AliciaP1.  You don't need to do any of this.  As an RDP you are not married for federal purposes.  You will simply file completely separate returns as if you were single (or head of household if you have any dependents).  You don't have to allocate your income for your federal return at all.

Your joint return in California is the only return where things need to be put together.

Here's the IRS FAQ on RDPs.

@Anonymous

[Anonymous]

Hi @RobertB4444, that's definitely incorrect. See this explainer from TurboTax mentioned above and Publication 555 from the IRS. From Page 10 of that IRS publication, under the heading "Separate Return Preparation": "Form 8958 is also used for registered domestic partners who are domiciled in Nevada, Washington, or California. A registered domestic partner in Nevada, Washington, or California must follow state community property laws and report half the combined community income of the individual and his or her registered domestic partner."

The FAQ you posted also includes Q13: 

Q13. How should registered domestic partners report wages, other income items, and deductions on their federal income tax returns?

A13. Registered domestic partners should report wages, other income items, and deductions according to the instructions to Form 1040, U.S. Individual Income Tax Return, and related schedules, and Form 8958, Allocation of Tax Amounts Between Certain Individuals in Community Property States. Form 8958 is used to determine the allocation of tax amounts between registered domestic partners. Each partner must complete and attach Form 8958 to his or her Form 1040.

[RobertB4444]

@Anonymous  You're absolutely right.  I read through the questions but not as far as number 13.  Should have kept going.  Apologize.

However, I have a good answer to your question now and it's an easier one than any of your three solutions.  Even though you are only RDP for 2/3 of the year your status as "married or not married" is determined by your status as of December 31st.  So, since you were RDPs prior to December 31st you are considered married for community property purposes for the entire year.  No dividing by days is necessary.

[Anonymous]

I'm going to answer my own question on the Medicare wages part. On the IRS website, they have an example in the self-employed page that sheds light on this issue and specifically says "Each individual will calculate Additional Medicare Tax based on his or her own wages without regard to the income tax treatment of wages as community property income." So no need to re-allocate for Additional Medicare Tax.

For NIIT, I'm still not sure, but possibly Form 8960, Line 7 is where such an adjustment should occur (assuming it occurs at all, which maybe it doesn't as the Additional Medicare Tax above indicates is possible).

[AmyC · Accepted solution]

Form 8960, line 7 would be the only good place to subtract the investment income, if you need to subtract it. Medicare tax is based on earnings. The NIIT is investment based. The question becomes who owns the investment income to determine if the investment income is split. Refer to your state law as it varies.

You are clearly aware of IRS pub 555 and its section on RDP which states:

The expenses for separate business or investment income is deductible by the RDP who earns the income.

If the income is split, so are the taxes, which would include NIIT. See pub 555 for relief from tax liability which states:

Relief from liability for tax attributable to an item of community income.

You aren't responsible for the tax relating to an omitted item of community income if all the following conditions are met.

1. You didn't file a joint return for the tax year.
2. You didn't include the item of community income in gross income.
3. The item of community income you didn't include in your gross income is one of the following.
   1. Wages, salaries, and other compensation your spouse (or former spouse) received for services he or she performed as an employee.
   2. Income your spouse (or former spouse) derived from a trade or business he or she operated as a sole proprietor.
   3. Your spouse's (or former spouse's) distributive share of partnership income.
   4. Income from your spouse's (or former spouse's) separate property (other than income described in (a), (b), or (c)). Use the appropriate community property law to determine what is separate property.
   5. Any other income that belongs to your spouse (or former spouse) under community property law.
4. You establish that you didn't know of, and had no reason to know of, that community income.
5. Under all facts and circumstances, it wouldn't be fair to include the item of community income in your gross income.

[Anonymous · Accepted solution]

I'm going to revisit this one year later to add that what was posted by @AliciaP1 was wrong. You do, in fact, report an adjusted W2, as well as adjusted 1099-INT's, 1099-DIV's, etc.

From Publication 555:

"Separate Return Preparation
If you file separate returns, you and your spouse must each report half of your combined community income and deductions in addition to your separate income and deductions. Each of you must complete and attach Form 8958 to your return showing how you figured the amount you are reporting on your return. On the appropriate lines of your separate return, list only your share of the income and deductions on the appropriate lines of your separate tax returns (wages, interest, dividends, etc.). The same reporting rule applies to registered domestic partners."

and in https://turbotax.intuit.com/tax-tips/marriage/what-is-form-8958-allocation-of-tax-amounts-between-ce...:

"This means that domestic partners in community property states have to allocate their income. This creates the same extra work as for married couples filing separate returns:

Legally, their income is probably not going to match what has been reported to the IRS."

So the correct thing to do is to report the W2s from both partners on both of their tax returns. It will have values divided by 2 for boxes 1-2. For boxes 3-6, the wage earner reports in full and the partner reports 0 (this is because, boxes 3 and 4 are about Social Security wages which are considered separate property under Federal law which pre-empts any state law ruling, and for boxes 5 and 6, as noted above, Additional Medicare Tax is computed without regard for income splitting in community property states as well). Similarly, you will report both partners' 1099-INTs and 1099-DIVs, also with halved values if necessary for community property. The purpose of Form 8958 is to tell the IRS why the forms that have been reported to them from employers and banks/brokerages don't match what's reported on the tax returns of the partners. Form 8958 is of course attached to each partners return.